Bangalore:Private equity (PE) firms invested less in real estate projects in India in the first half of this year than in the year-ago period, mainly because there were fewer new or expansion projects by developers and as fund managers had less money to deploy.
Realty firms raised about $424 million from PE funds between January and June, compared with $638 million in the same period last year, a 33.5% drop, according to estimates by VCC Edge, a research platform.
The number of deals, however, inched up to 22 from 20 earlier, indicating a greater deal of caution and a preference for smaller deals to mitigate risks.
Total PE investment in real estate in 2011 was $1.4 billion across 40 deals.
PE investments in real estate have gone down largely because the amount of capital available is limited, said Shirish Godbole, managing director, Morgan Stanley Real Estate Investing (MSREI)—one among the few funds that have been active in this period. “Given the need for capital, in the last year NBFCs (non-banking financial companies) have become more active in lending to the sector. We believe PE funding will remain muted over the next 12 months and expect to continue to see developers borrowing from NBFCs and selling to HNIs (high net worth individuals) to raise capital,” he said. “We may also see some sovereign funds coming to invest in Indian real estate.”
In one of the largest deals in recent months, MSREI invested $90 million in a Mumbai project of Sheth Developers Pvt. Ltd earlier this year. In another large deal this year, Xander Group Inc. invested about $40 million in a Chennai software park.
Such deals have been few.
A spokesperson of Xander Group said that for investors, the India story has come to represent corruption, bad fiscal policy, a hamstrung polity and an ineffective and inefficient leadership. But this also allows investors to find cheaper deals.
“For an asset-led, patient, control investor like Xander, the macro headwinds are an opportunity to find more realistic valuations and more investment opportunities,” the spokesperson said in an email. “As an investor, our mandate is to seek out those opportunities which are not evident to the market in general. And then add Alpha. So we like the current environment from an investment perspective.”
Fund managers and developers said PE deals are taking longer to close as investors have become cautious, making their due diligence processes lengthier.
Sunil Rohokale, group chief executive of financial services firm ASK Group, said few funds have closed or raised capital in recent months, and that many PE funds offer debt capital to developers these days instead of striking pure PE deals. He added that Ask Property Investment Advisors Pvt. Ltd, part of the ASK Group, is “open to invest, but we aren’t in a hurry. We are cautious and are looking at factors such as project location, quality of developer and returns.”
Two Mumbai-based developers, who didn’t want to be named, said in the present environment it is quicker to raise money from NBFCs that have a simpler due diligence process.
“We negotiated with a couple of (PE) funds for six months, but we didn’t agree on valuation and deal structure, and then settled for little less money from a large NBFC. We will raise some more capital, but again from an NBFC,” said one of them.